UK Mortgages and Loans is the complete resource for mortgages, remortgages, adverse credit and all types of UK loans and UK residential mortgages.

UK Mortgages & Loans -> What is a Mortgage?

A mortgage is simply a loan secured by a property. If you are unable to repay the loan your property will be at risk of being repossessed by the lender. A mortgage is one of the most popular loans, simply because everyone at some stage will need to purchase a property.

Nowadays there are a great number of different mortgages types available to a person. These various types would include mortgages that are fixed, capped, base rate tracker, variable, offset, discount, interest only and repayment only.

These forms of mortgages may also include a number of options, for instance they may have the ability of being able to take a payment holiday or not having any redemption penalties. It can be very hard for an individual to choose the best mortgage for their needs. It is therefore, important that they know what the different mortgage terms mean before they make any final choices on which mortgage provider to use.

The different mortgages are explained below:

Fixed rate mortgage – These mortgages have an interest rate which is charged at a fixed prearranged rate for a specific length of time. This also means that during this fixed rate period, the rate of interest charged on the mortgage loan will stay the same even if the general base rate of the bank significantly changes.

Variable rate mortgages – These types of mortgages have a rate of interest which can be changed by the mortgage lender at any time they wish. This is normally based on the Bank of England’s base rate. Because of this, the monthly payments of the mortgage could fluctuate, meaning that the repayment amount would decrease when the rates reduce but would also increase when the base rates rises.

Capped rate Mortgage – A capped rate mortgage is a form of a Variable rate mortgage simply because it has an introductory period when the upper point to which the rate of interest could increase is actually restricted. In other words, this means that the interest rate is able to decrease under this point, but it cannot go higher than it.

Discount rate Mortgages – These mortgages are a form of a variable rate mortgage because they also have an introductory period for which an arranged reduction in the normal variable rate is given.

A base rate tracker Mortgage - These mortgages have a variable rate of interest, but also follows the base rate of the Bank of England as well as having an extra percentage included as agreed with the mortgage lender at the beginning of their mortgage period.

Offset Mortgages (also known as Flexible/Lifestyle Mortgages) - These forms of mortgages mean that the sum of money borrowed for the mortgage is concurrent to the borrowers’ savings. This is very effective because the rate of interest on the borrowed amount is normally greater than that on the savings account. Due to the combining of both the savings and mortgage into a single account using the offset mortgage, the mortgage lender is able to reduce the remainder of the mortgage loan for which the interest will still be charged, by the comparable of the savings amount being held. The full amount on which the higher interest charges would be payable are thereby decreased, yet the borrower will not gain any interest on their savings.

The most frequent mortgage that is obtained by borrowers throughout the UK is the typical capital repayment mortgage. With these forms of mortgage, the repayment amount each month will include the interest amount charged on the loan borrowed, as well as a small part of the capital amount borrowed. If the borrower guarantees to repay the right monthly payment amounts and pay them on time, then at the end of the mortgage term, the mortgage loan will be fully repaid and the borrower will own their property.

Another form of mortgage – the interest only mortgages, also known as a 100% mortgage, have actually become increasingly common in the later years. These mortgages will need the borrower to repay just the interest amounts due on the mortgage loan amount, without having to include the capital repayments. The borrower may then well be asked to make their own arrangements for repaying the capital amount borrowed. They will have to repay this in one lump sum at the end of their mortgage term. This amount is basically the original mortgage loan amount prior to the interest being added on. For example if someone borrowed £100000 at the start of the term, they will still owe that at the end of the term. As this is such a large amount of money, it is highly advisable for the borrower to deposit money each month so that they can save this amount by the end of the loan term. Most people will do this by the means of an ISA or high interest savings account. The majority of mortgage advisers will tell the borrowers what they could do; some may even arrange it for them.

A problem which could arise with these mortgages is that although the borrower may be paying less each month and putting money aside for the end of the term, it is not guaranteed that they will save enough money to repay the capital amount. This is especially true if they decide to invest their money in stocks & shares – this could actually end up losing them money.

To find out more about each individual type of mortgage please click through to our other pages.

Whatever your requirements, a good mortgage broker will be able to give you a no obligation quote. See our best broker list for the most reputable companies for you to contact.